Are There Too Many Coffee Franchises?

I just spent the last 5 minutes online searching for “coffee franchises.”

I found close to 50 of them.

50 DIFFERENT coffee franchise opportunities you can own in the US.

Seems like a lot, right?

Let’s find out.

Key Takeaways

Coffee franchises can be profitable. But the math has to work. Competition is fierce. And it’s only getting tougher.

With nearly 50 coffee franchise concepts available in the U.S., the market is crowded. Add Starbucks to the mix, and your customer pool shrinks fast. Royalties eat into your revenue. So do loans, payroll, and rent.

That being said, multi-unit franchise ownership changes the picture.

For instance, 3 locations doing $800,000 each has the potential to generate $150,000–$175,000 a year in take-home income. But that takes 6–7 years to build. You need capital. You need energy. And you need a location where the demographics support the demand.

Finally, coffee franchises reward owners who do their homework. Check the competition. Run conservative numbers. And make sure the opportunity makes sense before you sign anything.

Some Coffee Franchise Math

Before I go through some of the numbers, I need to say something.

I’m not trying to be negative here.

But I do believe in reality. You should too.

That said, sometimes, a little basic math can uncover the reality of something.

Specifically, opportunities in coffee franchise ownership. And my feelings about there being way too many of them. Maybe you’ll agree. Maybe you won’t. Let’s dig in.

For starters, let’s say you’ve looked at several different coffee franchises, have done your due diligence, and landed on one. The initial cost? $285,000.

And in addition to coffee, you serve muffins and other inexpensive snacks ($5-$7 each). Cool.

5 months later, (after getting a decent location and building out your store), you open for business. Congratulations! How exciting!

And you, with the help of franchise headquarters, had a terrific grand opening, and are pleased with the numbers.

6 Months Later…

Your coffee shop is becoming organized the way you want it, you’ve been able to retain a couple of good employees, and there’s some decent local buzz about your franchise business.

Numbers-wise, you’re serving around 75 people a day-who are spending $7.00 each. That’s $525 a day X 6 days a week. Let’s call it $3,000 a week in sales.

If you do those kind of numbers all year, your total revenue will be $156,000.

With that in mind, the first year (at least) is the toughest in a startup business…franchise businesses included.

And while you haven’t broken even just yet, you’re almost paying all your bills. Meaning, you had to dip into your cash reserves to meet a payroll a few times, but you’re not totally losing sleep about it.

Let’s fast-forward.

Owning a Coffee Franchise: 2 Years Later…

You’ve been doing what you’re supposed to do as a franchisee.

You’ve followed the suggestions from headquarters on how to increase revenue and tighten up your expenses. In two years time, you’ve increased how much each customer is spending with you.

Here are your numbers in year two:

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You’re serving 110 people a day at $9.00 each.

That translates into $990 a day X 6 days.

That’s $6,000 in weekly sales.

That means you’re doing $312,000 annually. ($6k X 52 weeks)

Income-wise, after paying your monthly loan costs, inventory, payroll, utilities and several other business expenses, you’re starting to make a profit. Say, $9,000.

For the year.

That kinda sucks.

Let’s continue.

Coffee Franchises in Year 5

So, you’ve been a coffee franchise owner for 5 years now.

The hours are long…but it’s your business. That counts for something, right?

Numbers-wise, you feel you’ve just about peaked.

Wait.

Did I mention that there are now 3 different coffee franchises located within 3 miles of your location?

That, and other factors, may be contributing to your 5-year revenue numbers. Which are:

135 customers a day, spending about $11.00 each.

That’s $1485 daily, or $8900 a week.

That means your doing $462,000 a year (I always figure conservative numbers. If you’re doing more, great!)

And you’re now taking home about $45,000 a year after all of your expenses-including the 5.5% royalty on your revenue that’s automatically deducted by franchise headquarters.

The “S” Word in the Coffee Franchising Sector

One more thing-and it’s ugly. It’s the “S” word.

In this case, I’m talking about Starbucks (not a franchise).

If that’s the case, if there’s a Starbucks coffee shop near you, what kind of numbers are they doing?

And how much is that store affecting your numbers?

Because, I’m willing to bet that your local Starbucks location is serving 350-500 customers a day.

That means those people are not spending money in your coffee franchise business.

Is This Hypothetical Coffee Franchise Worth It?

“Joel, those numbers sound kind of low. Surely, there are coffee franchises doing much better. Maybe $700,000- $800,000 a year in sales. Especially if they serve a lot of food with their hot beverages.”

That’s 100% correct.

But remember, the initial investment for more of a full-service coffee shop with say sandwiches and stuff, is probably closer to $500,000 or more. That means your loan payments are higher, as is your lease and your inventory and payroll costs.

Given that, let’s say you, as the franchisee of a full-service coffee shop franchise are taking home $75,000-$85,000 a year. Or, even $100k.

After 4-5 years in business. And working 8 solid hours a day.

Would that be worth it to you?

Let’s Take Coffee Franchises Up a Notch

Maybe you answered that question above like this:

“I guess that scenario doesn’t sound bad, Joel. Especially since I want to own more than one.”

Now your talking.

Because 3 of these coffee franchises doing $800,000 a year in revenue adds up to $2.4 million. And probably $200,000-$250,000 a year in total profit to the franchisee.

Of course that’s after 6-7 years in business, based on you opening one coffee shop every two years or so.

But the loans.

Exactly.

Those are going to be (combined) big loan payments.

For several years.

That means you may want to dial back your profit a bit.

To maybe $150,000-$175,000 a year.

As a multi-unit coffee franchise owner.

Would that be enough for you?

Would those numbers be worth the risk?

That’s for you to decide.

Why I Wrote This

Look, I know consumers want choices.

But, how many different coffee shops can a customer go to in a week’s time or a month’s time?

Furthermore, how many times a week can and will they spend money in a coffee shop?

While you’re thinking about that, it’s fair to say that once a customer finds a place they like-they tend to frequent that place.

And if it’s your coffee franchise that’s a good thing.

But in my experience, that Starbucks located near you has a darn good amount of loyal customers.

Will they visit your shop?

Probably-to at least try it.

But, unless you serve a tremendous product and/or offer a unique and/or unreal experience, they’ll probably go back to Starbucks. Or maybe one of the other coffee shops near your store.

Bottom Line?

I think there are way too many coffee franchises around. And new ones continue to pop up several times a year.

However, if you think you can do big numbers with a coffee franchise, I won’t stop you from buying one-as long as you have the money and the energy needed to own a business in this sector of franchising.

Given those things, I will encourage you to:

• Check out your local demographics
• Consider the competition-including the location of the nearest Starbucks
• Be realistic about how many customers will spend money in your coffee franchise on a weekly basis
• Encourage multi-unit ownership-if the franchise has a proven track record across the country
• Do your homework and write a conservative multi-year business plan

Then, and only then, should you consider owning and operating one or more coffee franchises.